20VC Breaking News Ankur Nagpal Raises $70M for Vibe Capital, What The Next Decade For Venture Will Look Like, Do VCs Actually Add Any Value & PreEmptive Rounds, When To Take Them and When To Reject Them

In a dynamic conversation on 20 VC, Harry Stebbings interviews Anka Nagpal, founding partner at Vibe Capital, who shares his transition from founder and CEO of Teachable to venture investing. Anka discusses the lessons learned from early investments, the importance of instincts honed by experience, and the challenges of maintaining founder relationships amidst rapid deployment pressures in venture capital. He also unveils the launch of Vibe Capital's second fund, emphasizing a more concentrated investment strategy, and reflects on the nuances of investing in emerging markets, underscoring the potential pitfalls of overfunded startups without product-market fit. Anka's approach is informed by his background as a founder, prioritizing emotional support for entrepreneurs and advocating for a hands-off, trust-based investor relationship that can evolve over time.

• Anchor Nagpal is the founding partner of Vibe Capital.
• Anchor has previously invested in companies like Rome Research, Eight Sleep, Circle, Hone Health, and Maven.
• Before venture, Anchor founded and led Teachable until its acquisition by Hotmart for $250 million in 2020.
• Harry Stebbings thanks Josh Buckley and Todd Goldberg for their question suggestions.

"Now, I'm not going to break the news ahead of time, and I'm going to leave that for Anchor. But Anchor has previously made investments in the likes of Rome Research Eight, Sleep Circle, which we did together, actually hone health and maven, to name a few."

Anchor Nagpal has a history of successful investments and has transitioned from a company founder to an investor in the venture capital space.

• Anchor credits mentors Jeff Fagnan and Naval Ravikant for guiding him into fund investing.
• Anchor's first two investments as a fund manager did not succeed, highlighting the learning curve in venture capital.
• The importance of experience and the value of "reps" in developing investment instincts is emphasized.
• Anchor discusses the challenges of transitioning from angel investing to managing a fund.

"Jeff Fagnan accomplish and naval ravikanth at Angelist. They created a program called Spearhead where their thesis, which now seems genius in retrospect, but this was maybe four years ago, was that founders will make great investors, so let's give them capital to do that."

Anchor attributes his entry into fund investing to the support and belief of his mentors in the potential of founders to become great investors.

• Anchor expresses a strong sense of fiduciary responsibility, especially when managing other people's money.
• His conservative approach to fund management is influenced by a desire not to lose investors' money.
• Anchor discusses the psychological aspects of investing and the battle between fear and fearlessness.

"I think I've always had a strong sense of fiduciary responsibility to the degree that it may probably is a weakness."

Anchor's investment philosophy is shaped by a commitment to the responsible management of investor funds, which may lead to a more conservative investment strategy.

• Anchor structured his fund to have a significant personal capital investment, aligning his interests with those of his LPs.
• He discusses the balance between disciplined investing and the pressure to deploy capital quickly in a competitive environment.

"I put a large amount of capital into the fund myself. So for the first fund, it was a third of the fund. For the second fund, be 25% of the fund."

Anchor's personal investment in his funds serves as a strong signal to LPs of his commitment and alignment with their interests.

• Vibe Capital is officially launching its second fund, with a significant increase in fund size from the first fund.
• The strategy involves taking investing more seriously and aiming for a concentrated portfolio with fewer, more substantial investments.

"We're now excited to launch fund two, which will be at least $70 million, maybe a little bit more."

Anchor announces the launch of Vibe Capital's second fund, marking a step up in the firm's investment strategy and commitment.

• Vibe Capital's second fund aims for around 40 core positions with an average investment size of $1-1.5 million.
• The goal is to own close to 5% of a company, though this is not a strict rule and there will be exceptions.

"So for fund two, our goal is to concentrate a little bit more. I think we'll end up with roughly 40 ish core positions."

Anchor explains the portfolio construction strategy for the new fund, which involves a more concentrated approach than the first fund.

• Vibe Capital does not keep formal reserves, preferring flexibility to adapt to new information.
• Each Prorata opportunity is evaluated as a new investment decision, independent of previous investments.

"So we have not kept reserves the way we do. Prorata is different from a lot of other funds, frankly, who have much greater aum where I look at each Prorata as a new investment, completely."

Anchor describes Vibe Capital's approach to reserves and follow-on investments, emphasizing a case-by-case evaluation process.

• Harry Stebbings discusses the investment approach of considering a company's potential to increase in value by 100 times.
• They prefer to write larger checks in the early stages (first two or three rounds) and then use SPVs for later stages.
• The fund avoids taking Prorata from the main fund in later stages to maintain alignment with their investment model.

"Like, is there a ridiculous set of circumstances that could lead to this company being worth 100 times more than it is today?" This quote emphasizes the importance of envisioning a company's growth potential when deciding to invest, especially in the context of early-stage investments.

• Anchor Nagpal expresses a shift from initially succumbing to FOMO to a more disciplined approach of declining small allocations in "hot" rounds.
• Nagpal highlights the lack of value in being a mere name on a cap table and prefers meaningful relationships with founders.
• The evolution of investment strategy now includes avoiding rounds with numerous high-profile investors for more meaningful engagements.

"But as things have evolved, I've gotten a lot more comfortable saying no." This quote reflects Nagpal's growth as an investor, moving from a fear of missing out to a more selective and thoughtful investment approach.

• Nagpal values the depth of relationships built over time, citing his evolving relationship with Jeff from Accomplice.
• The relationship with Jeff has grown from a seed investor to a partner in co-investing, showcasing the importance of nurturing long-term connections.
• Nagpal aspires to be a supportive investor, mirroring the support he received from Jeff.

"I think you have the opportunity to build these amazing relationships that compound over 5, 10, 20 years, and that just doesn't happen when it's a transactional relationship..." This quote emphasizes the significance of building deep, long-term relationships in the venture capital industry, as opposed to superficial, transactional ones.

• Nagpal acknowledges a shift towards transactional relationships in venture capital due to compressed fundraising timelines.
• He maintains close relationships with a subset of founders and prefers to invest in unconventional deals where he can have a significant impact.
• Nagpal is drawn to leading or co-leading rounds, especially in non-consensus deals that may not be as popular among other investors.

"Yes, it has, but I think it's bifurcated." Nagpal agrees that the venture landscape has become more transactional but also notes that there are still opportunities for close, meaningful founder-investor relationships.

• Nagpal discusses the challenge of price discipline in the context of historically high market valuations.
• He uses a mental exercise to determine whether a company could potentially grow 100 times in value as a gauge for investment decisions.
• Despite high prices, Nagpal believes there is still value to be found in non-consensus deals.

"I feel like we're always going to be in a place where we'll be complaining about price." This quote suggests that concerns over valuation are not new and that investors have always grappled with pricing in different market conditions.

• Nagpal expresses concern for companies raising large rounds without having achieved product-market fit.
• He cautions against the trend of multistage firms and hedge funds investing in trendy companies without due diligence, potentially leading to negative outcomes for founders.
• Nagpal emphasizes the importance for founders to optimize for median case outcomes, where they can still achieve wealth without solely focusing on the best case scenario.

"And I think the people who are getting hurt the most... are companies that are raising very large rounds and don't have product market fit..." This quote highlights Nagpal's worry about the current investment frenzy leading to potentially harmful situations for companies without a solid market foundation.

• Nagpal reflects on the acquisition of Teachable by Hotmart as a "middling outcome," indicating a moderate level of success.
• He is proud of the team's accomplishments but acknowledges that the outcome was not at the extremes of success or failure.

"Yeah, I would classify us as very much as a middling outcome." This quote provides an honest assessment of the Teachable acquisition, suggesting that not all exits are blockbusters, yet they can still be considered successful.

• Nagpal advises founders on when to accept or decline preemptive funding rounds.
• He suggests that accepting a preemptive A round is reasonable, but a preemptive B round should be approached with caution.
• The emphasis is on the importance of product-market fit before taking on significant funding.

"In a lot of cases, advise a founder, like, I think a preemptive a, you do it, a preemptive b, you don't." This quote offers strategic advice for founders on managing early investment offers, highlighting the critical nature of product-market fit in these decisions.

• Harry Stebbings discusses the balance between securing good terms and accepting lower offers during fundraising.
• He emphasizes that he would not advise founders to take money on worse terms, aligning his advice with his personal values as a founder.
• Harry suggests aiming for the 85th to 90th percentile in terms of pricing, advocating for a strong but not necessarily the highest valuation.

"I would personally do that. At the same time, I would never advise founders, and I see some investors saying this to advise founders to necessarily take money on worse terms."

The quote highlights Harry's personal approach to fundraising and his reluctance to advise founders to accept unfavorable terms, reflecting his integrity and experience as a founder.

• Anchor Nagpal addresses the topic of founders selling their shares early in secondary transactions.
• Nagpal acknowledges the investor concerns regarding founder motivation but prioritizes the founder perspective.
• He advocates for founders to take secondary sales if it makes sense for their personal financial security and market conditions.
• Nagpal points out that founders who are shrewd with their cap tables often demonstrate smart decision-making in other aspects of their business.

"So my advice has been, take the secondary missions are unnatural and I would be doing the same."

This quote illustrates Nagpal's supportive stance on founders taking secondary sales, emphasizing his belief in the rationality of securing financial stability.

• Anchor Nagpal explains his bullish stance on emerging markets, focusing on their potential for rapid growth and the ability to use capital as a competitive advantage.
• He notes the significant number of new internet users in markets like India and the trend of educated immigrants returning to apply their skills in these large markets.
• Venture capital is seen as particularly well-suited for emerging markets due to their characteristics and growth potential.

"I think venture, this toolkit is in some ways better suited for these markets than a lot of the other markets they have been applied in thus far."

Nagpal's quote conveys his enthusiasm for the fit of venture capital in emerging markets, emphasizing the unique opportunities presented by their growth dynamics.

• Harry Stebbings inquires about Nagpal's criteria for investing in emerging markets.
• Nagpal lists a founder's international experience, proven business models, and reasonable pricing as key factors.
• He also highlights the importance of understanding local nuances and conducting thorough diligence, including assessing integrity in these markets.

"The one addition that I would add, and this may again sound a little bit controversial, is I do think you sometimes have to screen for integrity a little bit higher."

The quote underscores Nagpal's emphasis on the importance of integrity and local insights when evaluating investment opportunities in emerging markets.

• The conversation turns to the rapid increase in investment activity and valuations in markets like Pakistan.
• Nagpal discusses the balance between capitalizing on investor interest and the risks of over-heated markets.
• He advocates for patience and local insights to navigate hype cycles and emphasizes the importance of early-stage investments.

"So I think right now, whenever something's on the peak of the hype cycle, typically we would wait a little bit and wait for it to sort of start regathering momentum."

Nagpal's quote reflects his cautious approach to investing during periods of heightened market excitement, suggesting a strategy of waiting for more sustainable momentum.

• Harry Stebbings questions the future prevalence of founder-operator funds in venture capital.
• Nagpal predicts a seismic shift towards more operator funds due to founders' preference to raise from other founders.
• He believes that top firms will remain valuable, but those in the middle may face increased competition from both ends of the spectrum.

"I have still never met a founder that doesn't at least have a preference for raising from other founders."

This quote highlights Nagpal's view on the enduring appeal of founder-operator investors, suggesting a continued trend towards their increased presence in venture capital.

• The discussion explores whether large incumbent firms might acquire smaller operator funds.
• Nagpal argues that maintaining the independence of operator funds is crucial and suggests that incumbents may instead become LPs (Limited Partners) in these funds.
• He emphasizes the energy and alignment that founder-operators bring to the venture industry.

"I don't think it would be prudent of them to acquire these operator funds. They may choose to anyways, but it won't be prudent because I think what makes these funds special is the fact that they're independent."

Nagpal's quote expresses his belief in the value of independence for operator funds and his skepticism towards the idea of acquisitions by larger firms.

• Majority of investors are perceived to detract value rather than add it.
• The fundamental rule for investors is to do no harm and be minimally burdensome.
• Quick, supportive actions like signing and wiring promptly can make an investor stand out.
• Emotional support, especially from experienced founders, is highly valued by new entrepreneurs.
• Few companies succeed solely because of their investors; the impact of venture capitalists is often marginal.

"Honestly, I think the majority of investors take away value. Not a ton take away value."

This quote indicates that while many investors may not be significantly detrimental, they often do not contribute positively to the value of the companies they invest in.

"The first rule to me is just do no harm."

This quote underlines the primary principle that investors should adhere to, emphasizing the importance of not causing problems for the companies they invest in.

"A lot of times the value I got from my investors, and that's the value I want to give my companies. And maybe they don't think of it that way, but it's emotional support, right?"

This quote highlights the often underappreciated aspect of emotional support that investors can provide, which can be crucial for entrepreneurs, especially those without co-founders.

• The financialization of everything is a growing trend, with venture capital and public markets increasingly overlapping.
• The distinction between private and public markets is blurring, with liquidity becoming more available in private markets.
• Venture capital is expected to become more integrated with the broader financial market, with more people investing in startups.

"I think venture and public marketing will kind of, right now they seem like two distinct things. I think they will keep sort of happening on a continuum where the differences will start becoming less and less."

This quote predicts a convergence of venture capital and public markets, suggesting a future where the lines between them are less defined.

"All investing is going to start existing on the same continuum, and just the entire population is starting to take a greater interest in financial markets and all of that."

This quote suggests a democratization of investing, with a broader population engaging in financial markets, including early-stage investing.

• The impact of a book is often tied to the stage of life when it is read.
• Strengths can include an optimistic outlook, while weaknesses may involve operational disorganization.
• The hardest part of investing is incomparable to the challenges of operating a company.
• Founders are advised to hire capable people and allow them autonomy, a practice that is easier said than done.
• Understanding the venture model's preference for high-growth potential over solid businesses at great prices is crucial.

"My biggest strength is, and there's a word, it's not a dictionary word called pronoya, but it's like the sense that the universe is conspiring on your behalf."

This quote reflects the speaker's optimism, which he considers his greatest strength, suggesting it has been beneficial in business.

"My biggest strength... I think I'm a complete train wreck of a human when it comes to being an operator."

This quote candidly acknowledges the speaker's organizational shortcomings, indicating the importance of self-awareness and compensating for weaknesses.

"The most common piece of advice I give founders is hire people better than you and just get out of their way."

This quote conveys a commonly given piece of advice about delegation and trust in the abilities of others, which can be challenging to implement.

• The speaker is excited about investments that cater to local markets and bridge traditional practices with modern technology.
• Investments in emerging markets that respect the existing cash-based economy while fostering digital payments are particularly appealing.

"It's a company called Loop... It's something that I think is super, super powerful because that's what digitizes a country."

This quote explains the speaker's enthusiasm for a company that is innovating in the payment space in Pakistan, highlighting the potential for technology to transform economies.

• The conversation ends with mutual appreciation and excitement for the future.
• The discussion touches on the broadening interest in venture capital and the anticipation of market changes.

"Some very exciting times ahead for anchor and I want to thank him for his friendship."

This closing statement expresses personal gratitude and looks forward to future developments in the guest's career and the venture landscape.